Public Bill Committee

[Mr. Roger Gale in the Chair]

(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)

Roger Gale: Good afternoon ladies and gentlemen. Welcome to the first sitting of the 2007 Finance Bill. For the convenience and comfort of Members, it may be interesting to note that, as long as I am in the Chair, hon. Members may remove their jackets if they wish. I cannot guarantee the same sartorial indulgence from Mr. Illsley, although I dare say it is likely. That is for him to decide.
Just before we start there is one modest typographical error—well not modest for the hon. Member concerned—that should be corrected. Hon. Members may note that Helen Goodman appears on the list of Members serving on the Committee. In fact, it should be Mr. Paul Goodman—[Interruption.] Yes, well we have been through all those jokes already.
May I also remind hon. Members that adequate notice must be given of amendments? As a general rule, I and Mr Illsley will not call starred amendments, including any starred amendments that may be reached during an afternoon’s sitting of the Committee. That said, I now call upon the Minister to move the sittings motion.

Stephen Timms: I beg to move,
That the Committee shall meet—
(a) on Tuesdays at 10.30 a.m. and 4.30 p.m., and
(b) on Thursdays at 9.00 a.m. and 1.00 p.m.,
when the House is sitting.
I should like to take the opportunity to say a few brief words. May I begin by extending a warm welcome to you, Mr. Gale and to your co-Chairman, Mr. Illsley? We welcome the experience and knowledge of bothof you and we are confident that you will be able to guide us through the Committee ensuring that our deliberations are both thorough and to the point. We look forward to that. May I also welcome Mr. Doig to his role?
It has been a number of years since I last served on the Committee. I am delighted to be back. It is the first time for many years that the Paymaster General is unable to be with us because of a short period in hospital. She is now out of hospital and doing well. I am sure that the Committee will want me to send her its good wishes.
May I extend a warm welcome to the hon. Member for Chipping Barnet who will lead for the Opposition and to the members of her team, the hon. Members for Rayleigh and for Fareham and those who will be supporting them, particularly those who are servingon this Committee for the first time, including thehon. Member for Wycombe. [Hon. Members: “And for Bishop Auckland.”] It did occur to me to wonder why the numbers of our side of the Committee looked quite as large as they did on the initial list, but that has now been explained. I welcome the hon. Member for Wycombe to the Committee. May I also welcome the hon. Member for Falmouth and Camborne and her Liberal Democrat colleagues and the hon. Member for Dundee, East?
I am joined today and will be supported throughout these debates by the Financial Secretary to the Treasury, and by the Economic Secretary to the Treasury. I am delighted to see them here. I know that they will want to join me in welcoming my hon. Friends to this Committee.
Could I just put on record my thanks to the many advisers and representative bodies that have advisedus in significant ways on the Bill? We shall welcome further contributions from them as we scrutinise the Bill in greater depth over the coming weeks. I look forward very much to our debates as we fulfil together our duty in examining this Bill in Committee.

Theresa Villiers: I am delighted to be able to respond on behalf of my hon. Friends to the Chief Secretary’s introduction, made in his characteristic bipartisan and friendly manner that we very much welcome. It is a great pleasure to serve under your chairmanship, Mr. Gale and under your co-Chairman, Mr. Illsley.
I am happy to offer some brief opening remarks on behalf of my Front-Bench team, my hon. Friends the Members for Rayleigh, for Wycombe, for Fareham and for Bexleyheath and Crayford. It is always a pleasure to serve alongside my colleagues on the gruelling task that awaits us all over the new few weeks. I know that my hon. Friends will be applying their usual forensic scrutiny to the Bill.
I should also welcome my Back-Bench team: my hon. Friends the Members for Braintree, for Ludlow, for South-West Hertfordshire, for Rochford and Southend, East and for Windsor. I am particularly impressed that my hon. Friends the Members for Braintree, for Ludlow and for South-West Hertfordshire have volunteered for their second Finance Bill.

Brooks Newmark: Third.

Theresa Villiers: And third in the case of my hon. Friend the Member for Braintree. Such selfless dedication to the proper scrutiny of the nation’s tax law will not go unnoticed in high places, I am sure. The hard work of my hon. Friends is much appreciated. I, too, should like to welcome the hon. Members for Falmouth and Camborne and for Member for Dundee, East. I am sure that their contributions will be very useful.
I am pleased to see the Chief Secretary, the Financial Secretary, and the Economic Secretary in their places, and I look forward to debating the Bill with all of them. We are sorry that the Paymaster General is not able to take part in the Committee this year, but we wish her all the best in her recovery. There are many issues over which the Paymaster General and I disagree. However, after a decade of Finance Bills, I think that she deserves a year off. Anyone can deserve a year off for good behaviour. She has obviously worked extremely hard on many Finance Bills for many years. No doubt, the Chief Secretary will be an admirable stand-in for her.
We also look forward to debating with Government Back Benchers. No Committee on the Finance Bill would be complete without the hon. Member for Wolverhampton, South-West. After his contribution during the Committee of the whole House, I look forward to many amendments from him to change all references to the word “premiums” in the Bill to the more correct “premia”.
Like the Chief Secretary, I look forward to relying on briefing and technical advice from a number of outside advisers—in particular, the Chartered Institute of Taxation, the Law Society, the Institute of Chartered Accountants for England and Wales, PricewaterhouseCoopers and KPMG. My hon. Friends and I look forward to a wide-ranging debate over the next few weeks in which we will seek to remedy any defects in the Bill and promote much-needed reform of the tax system to tackle complexity and to move towards fairer, more rational and simpler taxes.

Julia Goldsworthy: It is a great privilege to serve under your chairmanship, Mr. Gale. I should also like to welcome all membersof the Committee and say how much I am looking forward to debating with them in the coming weeks. Like the hon. Member for Chipping Barnet, I am sure that we are all disappointed—not least the Paymaster General herself—that the Paymaster General is not serving on an 11th and perhaps record-breaking Finance Bill. I am sure that she can look forward to coming back next year.
I should also like to put on record my thanks to other organisations that have provided briefings and technical advice. I should like to dwell for a few moments on the procedure that we are about to go through in terms of debating the sittings. On Second Reading, I raised the issue of receiving evidence at the Committee sittings, as other Public Bill Committees have done since 1 January this year. The Statistics and Registration Service Bill, which I sat on earlier this year, was the first to undergo such a process. The hon. Member for Wolverhampton, South-West pointed out that no organisations had come forward to give evidence to that Bill and that made me wonder whether any outside organisations would be interested in participating in such a process here.
The new Public Bill Committee process was recommended by the Select Committee on Modernisation of the House of Commons in its first report sitting of 2005-06 entitled “The Legislative Process”. In a summary, it concluded:
“As a matter of routine, Government bills should be referred to committees which have the power to take evidence as well as to debate and amend a bill, and these committees should be named public bill committees.”
Unfortunately, we are still operating under the old system and we do not have that opportunity.
 I took the liberty of contacting some organisations to see whether they would be willing to participate. Many of those organisations contributed to the evidence sessions of the Select Committee on Modernisation of the House of Commons. I want to quote a few of the comments. Given the short time scale, a not insignificant number of organisations were keen to support the suggestion: the Low Incomes Tax Reform Group; the Institute of Directors, the British Chambers of Commerce; the Society of Trust and Estate Practitioners; the Association of Taxation Technicians and the Chartered Institute of Taxation.

Roger Gale: Order. I hesitate to interrupt the hon. Lady so early in our proceedings, but I fear that she is now out of order. However, the Chief Secretary will have heard what she said and if he chooses to make representations in the appropriate quarter and to the Leader of the House, it is open to him to do so. There is no timetable motion on the Bill, so there is no opportunity for the kind of evidence to which she referred to be taken and no opportunity for the list of possible contributors to be heard.

Julia Goldsworthy: Thank you, Mr. Gale. I am sure that the Chief Secretary heard what I said. If he would like to respond, I should be very grateful. I have nothing further to say, except that I am very much looking forward to working with him, with his colleagues and with other members of the Committee for the second year.

Resolved,
That the order in which proceedings are taken shall be:Clause 2, Clauses 4 to 6, Clauses 9 to 11, Clauses 13 to 19, Clauses 22 and 23; Schedule 2; Clause 24; Schedule 3; Clause 26; Schedule 4; Clauses 27 to 29; Schedule 5; Clause 30; Schedule 6; Clauses 31 to 37; Schedule 7; Clause 38; Schedule 8; Clause 39; Schedule 9; Clause 40; Schedule 10; Clause 41; Schedule 11; Clauses 42 and 43; Schedule 12; Clauses 44 to 46; Schedules13 and 14; Clause 47; Schedule 15; Clause 48 to 50; Schedule 16; Clause 51; Schedule 17; Clauses 52 to 66; Clause 68; Schedule 19; Clause 69; Schedule 20; Clauses 70 to 72; Schedule 21; Clauses 73 to 80; Clauses 85 to 96; Schedule 24; Clauses 97 to 104;Schedule 25; Clauses 105 to 108; Schedule 26; Clauses 109 and 110; new Clauses; new Schedules; Clauses 111 and 112; Schedule 27; and Clause 113.—[Mr. Timms.]

Clause 2

Charge and main rates for financial year 2008

Question proposed, That the clause stand part of the Bill.

Stephen Timms: We are determined to maintain the best possible environment for business in the UK. With unprecedented economic stability in the past decade, businesses have been able to plan and invest more effectively for the long term, which has brought a lot of benefit, as today’s high rates of employment underline.
Companies have also benefited from a highly competitive tax regime. Since 1997, the UK has led the way among its closest competitors in reducing corporate tax rates from 33 per cent. in 1997. The main rate fell to 31 per cent. in 1998, and to 30 per cent. in 1999. Those reductions have ensured that the corporation tax rate in the UK has been the lowest in the G7 throughout the last 10 years.
The combination of stability and a competitive tax environment has proved an immensely fruitful one for UK businesses. Members of the Committee may last week have seen press coverage of the latest research from the National Institute of Economic and Social Research on productivity in the UK, commenting on the recent acceleration in UK productivity growth. The paper by Mary O’Mahoney in last month’s National Institute Economic Review shows that
“the UK has managed to close the productivity gap significantly with the US, France and Germany”,
by contrast with
“poor performance in terms of productivity growth in the early 1990s”.
That improvement is a huge prize for the UK economy and reflects steadfast determination on the part of the Government to tackle the productivity gap, but other countries are changing, too. There are now new patterns of business activity and fresh challenges arising from globalisation, and the clause takes the next step to enhance the competitiveness of our business environment in the UK.
The clause cuts the headline rate of corporation tax again, enabling it to be charged for the financial year 2008-09 and cuts the main rate for that year from30 per cent. to 28 per cent. on non-North sea ring-fenced profits, leaving the rate for profits within the North sea ring fence unchanged. That will have a number of positive effects, which the Committee will readily acknowledge. It will boost the competitiveness of UK firms and encourage greater domestic investment on their part, it will make the UK an even more attractive location for foreign direct investment, and build on the success that we had last year, when we attracted more foreign direct investment than any other country.
The cut is accompanied by a series of reforms to wider business taxation, which will feature in later debates in the Committee. As a package, they represent the biggest set of reforms of the business tax system since the 1980s. The package modernises a rather outdated system of investment allowances for plant, machinery and buildings, and gives further support to innovative businesses by developing the R and D tax credit. With the cut in the main rate of corporationtax as its centrepiece, the package is pro-investment, pro-innovation and therefore pro-growth for the UK economy.
The clause identifies the main corporation tax rate for onshore activities separately from North sea ring-fenced activities. The North sea clearly is unique for both industry and Government; for a long time, it has had a separate tax regime, which is an arrangement that is common around the world. Our regime seeksto strike a balance between encouraging investmentand ensuring a fair return for the UK on itsnatural resources. In maintaining that balance, the Government have chosen to exempt the North sea from the main business tax changes in this year’s Budget, leaving the rates and the capital allowances regime unchanged.
North sea companies will continue to benefit from the special 100 per cent. capital allowances, which have encouraged recent high levels of investment. Some have argued on behalf of North sea businesses that they also should have benefited from the rate cut, but othershave wisely acknowledged that that would have been unrealistic given the current level of the oil price. Stability is also an important virtue in the industry, particularly with regard to capital allowances. The Bill does not include a system of capital allowances for companies within the North sea ring fence, as it does for other companies.
I hope that the Committee will welcome the cut in corporation tax and the accompanying package of reforms of business taxation. We want to maintain the best possible environment for businesses in the UK. At 28 per cent., the headline corporation tax rate will be lower than that of the US, Germany, France, Japan and all our other G7 competitors. The UK rate will be firmly established as the lowest of the major economies and will be below the average of the EU 15. I commend the clause to the Committee.

Mark Hoban: I welcome you to the chairmanship of the Committee, Mr. Gale. I look forward to serving under you during our scrutiny of the Bill.
It is perhaps appropriate to start our consideration of the Bill on a rare note of consensus. We supportthe move that the Government announced in the Budget in March to reduce to 28p the mainstream rate of corporation tax. It was not as ambitious as the proposal that was set out by my hon. Friend the shadow Chancellor to cut the rate by 3 per cent., but we congratulate the Government for making the change. It responds to the concerns that businesses had highlighted that the mainstream rate had become uncompetitive when compared with the rate in other major industrial countries.
Prior to the Budget, the UK’s corporation tax rate was about 1.4 per cent. above the Organisation for Economic Co-operation and Development average, having been 3.6 per cent. below it in 2000, so there had been a gradual deterioration in our rate in comparison with other major industrialised countries. In 2005, only 12 OECD countries had headline rates above that of the UK, compared with 20 in 2000. The Chief Secretary pointed out the cuts that had been made to the corporation tax rate prior to 2000, but no cuts were made subsequent to that date. Between 2000 and 2005, however, 25 of the 30 OECD countries cut their corporation tax rates, so we were lagging behind our industrial competitors in that respect.
It is worth reflecting for a moment on the impact that that had on the UK economy. A number of businesses chose to relocate their headquarters overseas. The Economic Secretary will know as well as I do the cases of Hiscox, Omega and Catlin in the insurance sector; they relocated from the UK to Bermuda for tax and regulatory reasons. When businesses undertook corporate transactions, it was interesting to see where they chose their domicile for tax purposes. So, when Experian de-merged from GUS, it decided to relocate its headquarters to Dublin, although it remained a UK-listed company.
Articles in The Sunday Telegraph have suggestedthat Colt Telecommunications, which moved to Luxembourg in the first half of last year, chose to do so for tax-related reasons. Also, according to an article in The Times, in the summer of last year, 40 major companies were said to be considering a move because of the uncompetitiveness of the UK tax regime. Indeed, the Government’s skills envoy, when he was director general of the CBI, said:
“A lot of our biggest businesses are now looking at whether they want to be domiciled here, because of the tax system.”
KPMG, in a submission to the independent Tax Reform Commission, said:
“It is not uncommon for groups to move unskilled and back-office activities overseas, but we are aware that some organisations are also actively considering moving white-collar jobs, and even the group holding location, for reasons which include tax considerations.”
There are complex reasons why companies seek to relocate overseas, but there tends to be a trend towards a low-tax jurisdiction. I am sure that Ministers have had the same discussions that my hon. Friends and I have had with major UK corporates and their advisers about the impact that high tax rates have on the choice of jurisdiction and on competitiveness.
We also have some quantitative analysis; it is not just anecdotal evidence that underpins the sense that the Government have allowed the tax competitiveness of the UK economy to deteriorate. In a recent survey,60 per cent. of businesses said that the UK tax system was having a negative impact on the UK’s international competitiveness, and only 10 per cent. of the businesses surveyed disagreed with that statement. So there is a consensus within business that the Government have allowed the tax system to get out of kilter with our competitors.
Of course, when a company chooses to relocate overseas, it is not just the corporation tax revenue that we lose, but other business taxes, such as VAT, employers’ national insurance contributions and rates on property that they occupy. Indeed, a report from PricewaterhouseCoopers estimated that, in 2004-05, FTSE 100 companies contributed £9.1 billion of corporation tax revenues and another £9.1 billion in other business taxes. So there is an important knock-on effect; where businesses locate in the UK, not only do they pay additional corporation tax, but they pay a significant amount in other corporate taxes, to the benefit of the Exchequer and the public services that are funded by these taxes. Of course, that analysis by PWC does not take into account PAYE, employees’ national insurance contributions and other such taxes.
This process is not just about companies leaving the UK because of uncompetitive mainstream corporation tax rates; it is also about inward investment going elsewhere. Google, Microsoft and Intel, among others, have chosen to set up significant operations in Dublin in Ireland as a consequence of the low tax rate there.
The Dutch Government are also mindful of the way in which lower corporation tax rates can act as a magnet to businesses, such that businesses will choose to go the Netherlands rather than locate to a high-tax economy. So they reduced their headline rate of corporation tax to 25.5 per cent. this year, to makethe Netherlands more attractive to international businesses. Part of the challenge that the Government have responded to here is that, because other countries were reducing their corporation tax rate, it was making the UK unattractive to those businesses when they made decisions about where to locate. Perhaps the lower rate of corporation tax in the Netherlands is one reason why Barclays might move its headquarters to the Netherlands if its bid for ABN Amro is successful.
In a sense, therefore, what I am trying to set out is that the rate of mainstream corporation tax has an impact on business decisions more widely and we cannot look at those decisions in isolation. As a former Internal Revenue Service commissioner in the United States said:
“We cannot, absolutely cannot, hope to compete in a global economy by setting corporation taxes in isolation.”
That is an important factor to bear in mind, and it is why we support the move by the Government to reduce the mainstream rate of corporation tax.
I accept, however, that maintaining tax competitiveness is not simply about reducing the rate of corporation tax; it is about the complexity and stability of the tax code, too. By the time the Bill concludes its legislative process, the UK will have a longer tax code than India. Indeed, we shall have the longest tax code in the world, and that complexity will bring its own costs. I am sure that my hon. Friend the shadow Chief Secretary to the Treasury will be able to use that fact again later in our considerations, although I do not want to come to that yet. There are strong arguments for supporting the Government in their aim of reducing mainstream corporation tax. When the Government do the right thing, we are prepared to support them. That is the principle of an Opposition who take their duties seriously.
The Chief Secretary touched upon the other consequential changes to tax and capital allowances, which are being used to fund the reduction in the mainstream rate of corporation tax. We have some concerns about how the Government have sought to fund that reduction, so we shall explore those issues at some length when we reach the appropriate clause.
We are grateful that the Chancellor sought to respond so positively and enthusiastically to the representations that my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, made just before the Budget and to the compelling case for simpler, lower corporation tax that was set out in a report by the independent Tax Reform Commission chaired by our noble Friend Lord Forsyth. It is good that the Government listened to and understood those arguments, and put them into practice, because they are to the benefit of all large businesses in the UK paying on profits of more than £1.5 million. That is why we support the Government in clause 2.

Adam Afriyie: I rise to speak to clause 2 largely from a business and economic perspective. The clause is certainly to be welcomed. In a competitive tax environment—to a certain degree, a global market in corporation tax, as it were—the United Kingdom needs to look at its corporation tax rates, particularly those for larger businesses, whose relocation would perhaps disproportionately affect their employees. I also welcome the recognition by the Government, and by the Chancellor in particular, that tax competition does exist, that there is a market and that we are part of that market, whether we like it or not.

Brooks Newmark: Does my hon. Friend share my concern that it is those very businesses, such as Google, which are growing fastest and creating jobs, that are seeking to flee this country and set up in the Republic of Ireland and elsewhere, notwithstanding the moves by the Government and the Chancellor in the Budget? Ultimately, that will cost jobs in this country, particularly in the high-tech sector.

Adam Afriyie: I do not disagree with my hon. Friend’s comments. It is not only Google that has been affected—we have heard about Hiscox and many other organisations. It is particularly those cutting-edge organisations in high technology or information services—organisations that can relocate almost at the drop of a hat—that would have been threatened if something had not been done to the corporationtax rate.
What I particularly welcome is that someone whom one might argue is a socialist Chancellor has clearly and unambiguously embraced the concept of markets. I have several concerns, however. There is no doubt that business is the engine of the economy. It generates all the jobs, all the taxes, all the income and all the livelihoods for everyone in Britain, and that includes Government employees and the voluntary sector. Without small and medium-sized enterprises and large businesses, there would be no jobs, no salaries and no incomes at all to support any of the good things that we want in society. I therefore welcome the reduction, but it raises many questions.
First, why is the reduction being introduced in the tax year 2008? We can see from clause 3 and many other clauses of the Bill—without straying into them now—that many of the other tax increases have been introduced in 2007, with immediate effect. So the question has to be answered: why 2008? Why are we waiting for a year to introduce the reduction in corporation tax?
A second question also needs to be answered. Clearly, by reducing corporation tax overall, we are reducing the Treasury’s tax take in the short and medium term. On the other hand, again without straying into clause 3, small business taxation is being increased. The question is: how does the Treasury estimate that the tax reduction—what is recovered in corporation tax—will compare with the tax increase on small and medium-sized enterprises? I have said that business is the engine of the economy. I would argue that the faster revving engine—the faster growingarea of the economy—is small and medium-sized businesses, so why has the Chancellor chosen to increase taxation on small and medium-sized enterprises, thereby dampening that engine, and reduce taxation on corporate enterprises? It is important that we have an answer to that, given that small and medium-sized enterprises have been encouraged to change mode over the past several years.
 Another concern arises because, having scanned through the publications and documentation behind the Bill, I have not yet managed to spot a figure for the number of organisations that will be affected by the corporation tax change. Again, I should be much obliged if the Chief Secretary would make it clearhow many businesses—and, therefore, how many employees—will be affected by the changes. If the Treasury has embraced the notion that there is tax competition, why 28 per cent.? Why not 27 or 26 per cent.? Again, perhaps the right hon. Gentleman will explain the reasoning behind the choice of 28 per cent. rather than another figure. [Interruption.]

Brooks Newmark: I appreciate my hon. Friend’s indulgence in giving way. I heard the Economic Secretary muttering under his breath from a sedentary position, “How are we going to pay for it?” If he understands the Laffer curve and looks at the example of the Republic of Ireland, he will see that tax competition and the lowering of corporation tax have increased the revenues that the Exchequer has managed to collect in Ireland.

Adam Afriyie: The Laffer curve is a fascinating curve; it is not to be laughed at. However, there is a slight problem with it in that there is a delay between the reduction in a tax rate and the eventual increase in the tax take. Therefore, there is an issue about the timing of the introduction of tax reductions. Certainly there is little controversy about the fact that the Laffer curve brings about a more vibrant economy and a better environment for business in the long term. It increases the tax take in the longer term because there is more enterprise, and more profit is generated in the economy.
I have a background question that is conceptual rather than ideological. What sort of tax system is the Bill trying to create? We originally had the classic systemcompany profits were taxed and dividends were not. Now it seems that we are halfway between an imputational tax system and the classic system. Can the Chief Secretary explain towards which tax system clause 2 is taking us? Are we looking for an amalgam—a fudge in the middle—heading back towards the classic system, or just dilly-dallying before moving back to the imputational system? What is the general direction of the change? Perhaps he could explain on which model this particular corporation tax reduction is based.
There is no doubt that all parties welcome the reduction in corporation tax on large businesses. We can argue about the levels and the timing, but there is no question that the reduction is to be welcomed. Personally, I welcome it because it demonstrates a shift in the mentality of the Government and shows that they recognise that markets, international markets and competition, particularly in relation to taxation, are important. Government should not try to control the levels of profit as it is for the Government to remove the obstacles to wealth creation and to ensure that Britain is a vibrant place with which to trade and do business. On balance, the changes are welcome, but I would like a few answers to the key questions: how many businesses are affected; what level of revenue change is expected; and what direction are we taking in clause 2?

Julia Goldsworthy: I will not challenge such an early consensus in the proceedings on this year’s Finance Bill. The Liberal Democrats and other organisations welcome the headline cut in the main rate of corporation tax from 30 to 28 per cent. starting at the beginning of the next financial year.
I have two questions to which I hope the Minister will respond. First, why will ring-fenced profits forthe first time be separated off from other profitsand charged at a different rate of corporation tax? Secondly, will he confirm whether, because of the other changes to capital allowances, the tax changes in the clause will move the tax burden around rather than cut it overall? Has he assessed who the winners and losers of the tax changes will be in terms of types and sizes of company? There has not been an overall net reduction in the tax burden for many businesses because the headline cut will be offset by changes to the capital allowance system elsewhere.

Brooks Newmark: I begin by drawing hon. Members’ attention to my entry in the Register of Members’ Interests. I am a company director, but not of a large company, and that is what the clause relates to.
In paying attention to the detail of the Bill, I picked up the explanatory notes as soon as I heard the Chancellor’s speech because I was interested to hear that he was cutting the corporation tax rate, which is always a good thing. In the summary, the explanatory notes state:
“This clause charges corporation tax for the financial year”.
I was then hoping to read “2007”, but it states:
“for the financial year beginning 1 April 2008”,
which I thought was fair enough; the Chancellor was putting things off for a year to give people time to sort things out. However, on clause 3, which relates to small companies, the explanatory notes state:
“This clause sets the small companies’ rate of corporation tax for the financial year beginning 1 April 2007”.
I wondered why the Chancellor was so keen to halt the reduction in tax rates by one year for big companies, but was in a rush to increase it for small companies. I then looked at the Red Book and onpage 281, table C8, it states that the estimated receiptsare due to go up by £5 billion, from £44.9 billion to£50 billion. Is the real reason for the delay in reducing the main rate to avoid forgoing the increase of£5 billion from £44.9 billion to £50 billion? My first question concerns timing. Why was there a difference in timing? Was it to do with the extra £5 billion that the Government are seeking to grab from companies?
My second question has to do more with the point that I raised with my hon. Friend the Member for Windsor. What are the projections for 2008? We did not see much about that. Has the Treasury has conducted a study of the Laffer curve effect of the dropping rate of taxation and the anticipated receipts that will result? Is there a sensitivity analysis? The Economic Secretary, who has similar economic training to me, has no doubt spent many hours burning the midnight oil and carrying out a sensitivity analysis, as I would in his position.
As a great believer in and proponent of the Laffer curve, I suggest that the Economic Secretary considers the real-life example of the Republic of Ireland. The more that that country reduces the tax rate for companies, the more tax revenues it collects. That is an interesting conundrum, which the left traditionallyhas a hard time grasping. However, the Economic Secretary is an intelligent man and he looks for evidence-based examples. If he has considered Ireland, it would be interesting to know what sensitivity analysis he has done. As my hon. Friend asked: why did the Government chose the 28 per cent. rate? If they dropped it to 26 per cent., would they collect more tax revenues?

Edward Balls: The hon. Gentleman will know from his economic studies that the original Laffer curve was drawn up to advise Ronald Reagan on his approach to taxation and budget matters. What lessons did the hon. Gentleman draw from Ronald Reagan’s experience with budget policy making?

Brooks Newmark: The good thing is that for at leastthe next three years—or perhaps two—we in the Opposition ask the questions. In two or three years’ time, the Economic Secretary might have the opportunity to ask me such questions. However, my example, which is a recent one and not from ancient history—from Ronald Reagan’s time, when the Economic Secretary and I were both students—is the real-life example of the Republic of Ireland.

Rob Marris: May I suggest that when the hon. Gentleman talks about real-life examples, he considers what the distinguished Canadian economist and Nobel laureate, John Kenneth Galbraith, said about Reagan’s trickle-down theory, which is closely connected to what he is talking about? To put it graphically, Galbraith saidthat the trickle-down theory was about as effective as feeding horses oats in the hope that birds wouldeat more.

Brooks Newmark: As always, I appreciate the hon. Gentleman’s intervention. John Kenneth Galbraith, of whom I was a student, was someone I greatly admired. He took some of the Friedmanite bite from my intellectual approach to economics and softened the edges. That was an interesting quote, but it had no relevance whatsoever to the Laffer curve and my point about the Republic of Ireland.
My final point is about Britain and where it stands relative to the rest of Europe—or, indeed, the rest of the world—on tax competition. Notwithstanding the good move that the Government have made in trying to reduce corporation tax, which I would not want to criticise, I do criticise the depth to which they seek to cut it.
How do we sit in respect of corporation tax competition when we consider the broader world, our partners in Europe and, more importantly, what is going on in the world? How do we sit not only on tax competition but on the point made by my hon. Friend the Member for Fareham about the complexity of our tax system, which seems to be getting more and more intricate? There is a study called the “Burdens Barometer” which I watch avidly as the complexity and cost seem to increase year after year. I notice that the revenue projected from tax receipts in the Red Book is expected to rise to £50 billion next year. It is interesting that this very figure is mirrored by the £50 billion of additional cost to business caused by Government over-regulation.

Stewart Hosie: There are strong arguments for cutting corporation tax. I am delighted to hear the Chief Secretary pitch this cut as an attempt to increase economic growth. That is something that we tend to call for in Scotland. In the25 years since 1980, we have seen a 1.8 per cent. growth in Scotland as opposed to 2.3 per cent. in the UK as a whole and an average increase of 1.3 per cent. in a small European country. Our worst position in the past 10 years was a large gap of 2 per cent. in Scotland, around 2.8 cent. in the UK and approaching an average of 4 per cent. for the small European country. The cut in corporation tax is an essential driver of economic growth. It provides one of the bases of business and national competitiveness.

Adam Afriyie: The Chief Secretary said that this cut would be pro-investment, pro-innovation and pro-growth for large businesses. Does the hon. Gentleman have any idea why that same principle does not apply to small and medium-sized businesses, which it appears is where the money is coming from?

Stewart Hosie: I have no idea what goes through the minds of Treasury Ministers, but I think I agree in principle that small businesses provide the essential driver of local economies. All it takes is one verysmall business to become a Microsoft and the whole economy benefits. The hon. Gentleman is right in principle, but it is up to the Treasury team to tell us how they have reached their conclusions.

Brooks Newmark: The hon. Gentleman makes an excellent point. Is it not ironic that while the Government are reducing tax rates for big businesses, they are trying to increase it for small businesses and therefore reducing the incentives for those very businesses that should be the drivers of our economy?

Stewart Hosie: I think it is more paradoxical than ironic. It is also the wrong thing to do, particularly when there are other pressures on small businesses, not least the pressure of local business rates, which in many local economies remain a massive burden, taking a far larger share of turnover and profit than they should, certainly compared with large stores or large businesses in and around cities.
While welcoming the tax cuts, the Chief Secretary said that this was part of the biggest ever set of reforms in tax and allowances. He is absolutely correct. My worry is that however welcome this modest cut is—it could be more ambitious—the £3.7 billion that will be taken in 2008-09 and 2009-10 from the change to plant and machinery capital allowances alone outweighs the £3.6 billion that will be given back to businesses in the reduction in corporation tax yields.
I welcome the fact that the Government have recognised at last that tax competition is important. I am concerned that the overall package, which sees more yield coming in from one change to allowances than is given back in the tax cut, may not deliver its objectives, and as part of the overall change intax and allowance reform, particularly for small businesses—we have heard concerns about that—I may allow us not to see the competitiveness and the increase in economic growth that I am sure the Chief Secretary wants; we certainly want it for Scotland.
The performance of the cut will be measured carefully over the next year or two, but I suspect that if we are going to be serious about using the taxation system, particularly the corporation tax system, to drive business competitiveness, to stop companies leaving the UK and to make them competitive without putting downward pressure on wages, the Government will have to be far more ambitious in the changes that they make to the tax.

David Gauke: May I say what a pleasure it is to serve under your chairmanship, Mr. Gale? May I also apologise to the Chief Secretary for missing his opening remarks because I was otherwise engaged?
There is undoubtedly a consensus in the Committee that in 1997 the UK was in a very strong positionin respect of business tax rates. Over the following10 years, that competitive advantage has been eroded, not because business tax rates have gone up, but because many of our competitors in the rest of the world have cut business tax rates substantially. Our corporation tax rates are by no means exceptionally low; indeed, they are higher than many others.

Theresa Villiers: My hon. Friend refers to the fact that overall corporation tax rates have not gone up. He will be aware that other types of taxation on business have increased significantly.

David Gauke: My hon. Friend makes a valuable point, which I was about to raise. Corporation tax ratesare only one of the range of taxes that businessesface. Some research suggests that corporation tax constitutes at most 50 per cent. of the taxes that businesses pay.
The logic of the change announced in the Budget and implemented in the Finance Bill is to reduce the rate, but it does not reduce the burden. That is not a criticism, because there is something to be said for reducing the headline rate regardless of reducing the burden. Will the Chief Secretary confirm that an objective of Government policy is to reduce the rate itself, almost regardless of the burden, and that it is worth while achieving that in any event? Does he agree that a reduction in the burden is also important, and that that has not been achieved in this announcement? 
I think we all acknowledge that businesses are mobile. The chance of businesses moving to a country, or a jurisdiction, that has a lower rate of taxation has increased in the past 10 years as the world has become more global, as shown in the good examples given by my hon. Friend the Member for Fareham. First, does the Chief Secretary accept that that argument might apply to other types of taxation. I am thinking in particular of research published recently by the Institute for Fiscal Studies showing that income tax can also be competitive and can cause businesses and people to move from one jurisdiction to another. Secondly, if he accepts that argument for corporation tax—that mobility exists in a globalised world—would it also apply to other taxes, such as income tax?
Thirdly, the proposal appears to simplify corporation tax. Do the Government recognise that simplification of the tax system itself is a worthwhile objective? Fourthly, if they do recognise that that is a good thing, how does the Chief Secretary assess the Government’s success or otherwise in making the tax system simpler?

Stephen Timms: There has been an interesting exchange on the clause. The hon. Member for Fareham started very well by congratulating the Government. I hope we will hear more of that as the Committee goes through its work. However, his contribution deteriorated after that, when he gave us an unduly gloomy account of what has happened in the British economy of late.
I remind him of what I said in my opening remarks: there was more foreign direct investment into the UK last year than to any other country on the planet, which reflects the point that companies can more readily choose to locate almost anywhere in the world. The UK continues to be a very big gainer from that development. We must ensure that that continues, and it is important that we maintain a competitive tax regime. As I said, we have had the lowest headline rate of corporation tax in the G7 throughout the past decade. The change ensures that that position is maintained, but we must be competitive in other respects, too.

Philip Dunne: Will the Chief Secretary clarify what proportion of the statistic that he just quoted on the record level of inward investment was accounted for by a single transaction in the reorganisation of Shell?

Stephen Timms: Quite a substantial proportion, so it is instructive to look at the figures when the transaction is removed. I do not think that it should be, but if it is, the UK is second in the world, with £91 billion of inward investment. The US is in first place with £99 billion. The UK’s achievement on foreign direct investmentlast year was pretty extraordinary, reflecting thestrong competitiveness of its tax system and every other aspect of its business environment.
The hon. Member for Fareham made some remarks about complexity in the UK, of which we will no doubt hear more. I remind him that the tax law rewrite project is successfully simplifying tax legislation with all-party support. However, implementing the changes that arise from it will require legislation.
The hon. Member for Falmouth and Camborne and one or two others asked me what we thought would be the package’s economic impact. We have modelled its impact on the marginal cost of capital and on effective tax rates for a variety of investments. As I have said, the indication is that the package will increase the trend rate of investment.
The hon. Member for South-West Hertfordshire asked whether I agreed that having a low headline rate of corporation was a good thing in itself. The evidence suggests that the answer is yes. A lower corporation tax headline rate attracts foreign direct investment, which is one reason why the provisions are important. One would need to look at separate evidence for other headline rates, but there is no doubt in my mind andin the Government’s mind that tax competition is a reality.

Mark Hoban: What dynamic forecasting does the Treasury undertake to assess the impact of reducing the headline rate on inward and other forms of investment?

Stephen Timms: As the hon. Gentleman well knows, we have a well-developed model that is accessible to others. We have carefully modelled the impact of the proposed change on that basis and, to pick up another point that was made from the Opposition Benches, our modelling shows clearly that although the Bill will not change the overall burden of taxation—the amount taken from large companies—over the next few years, the overall impact will be an increase in the trend rate of investment.
The hon. Member for Falmouth and Camborne asked about the differential arrangement that we are introducing for the North sea, and it is not currently possible to make even a partly compelling case for reducing the level of taxation on the oil industry. Medium-term oil price predictions remain high, companies continue to generate very high returns on capital employed pre- and post-tax, and we recognise the importance of stability for the industry. It would not be appropriate to change the levels of taxation imposed on the North sea at the current time. I expect the very high recent investment in the North sea to be maintained.
The hon. Members for Windsor and for Braintree asked why the Bill gives a year’s notice of the change. The answer is that large companies pay their corporation tax in quarterly instalments, often in advance, throughout the year. Therefore, we need to set the main corporation tax rate a year in advance to give large companies certainty about their affairs.
The hon. Member for Windsor also asked how many companies would be affected. Some 41,000 large companies will pay corporation tax at a lower main rate as a result of the change. The hon. Member for Braintree asked where we stand compared with others. I can confirm that our corporation tax rate will again be the lowest in the G7, as it has been throughout the past decade. It will also be lower than the EU 15 average. After the change, that will be just over 28 per cent., so we will come in just under it. A wide range of studies shows that, on all sorts of bases, the UK continues to have a competitive tax and regulatory regime for business. This change will help to ensure that that continues to be the case.
I am glad that the Committee has warmly welcomed the clause.

Brooks Newmark: I appreciate the Chief Secretary’s answer on the timing issue, but I am curious to know whether he—or the Economic Secretary or the Treasury—considered the Irish example of lowering corporation tax by 1 per cent., 2 per cent. or 3 per cent. Has he done any sensitivity analysis on the Laffer curve about the collection of tax revenues to see whether lowering the rate would enable the Treasury to collect more taxes? I am trying to help the Treasury out; it clearly wants to collect tax revenues.

Stephen Timms: If corporation tax were reduced by a further percentage point, that would reduce the yield to the Treasury by £1.5 billion. It is incumbent on those who argue for such a change to explain what the source of that £1.5 billion would be, because the reduction would happen immediately. It could be resolved by a reduction in spending of the same amount, or an increase in taxation elsewhere.

Wayne David: Conservative Members frequently quote the example of the economic growth in the Republic of Ireland. Certainly, the reduction in corporation tax has been a factor there. However, is it not the case that there have been other factors, not least the significant sums of money that have been received from the European Union, which have been used very effectively? We all know the attitude of Opposition Members towards the European Union.

Stephen Timms: My hon. Friend is right. The Irish economy has enjoyed a good deal of success over the past few years. The corporation tax regime has contributed to that, but there have been a number of other factors, not least investment in education. Ireland has been very strong in that regard, and we need to learn from that.

Mark Hoban: I want to come back to the Chief Secretary’s estimate of the cost of a further 1p reduction in corporation tax. He said in answer to an earlier intervention of mine that, according to the Treasury’s model, the reduction in this Budget would lead to an increase in investment. Does his estimate of the £1.5 billion cost of that 1p reduction in the corporation tax rate include the offsetting effect of the increase in investments?

Stephen Timms: No. That is the straight reduction in yield to the Treasury following the change. The offsetting reduction that the hon. Gentleman describes would take some time to accrue. In many ways, I am surprised that there is no amendment seeking to reduce the rate further, given the proposals made by the shadow Chancellor. I do not know what was in the minds of Opposition Members to cause them not to table such an amendment. However, had one been tabled, it would have been necessary to explain where the extra £1.5 billion would come from.

Brooks Newmark: Will the Chief Secretary give way?

Stephen Timms: No, I ought to conclude now. I have tried the patience of the Committee for long enough. I am pleased that the clause has been so widely supported, and I commend it to the Committee.

Clause 4

Rates and rate bands for 2010-11

Question proposed, That the clause stand part of the Bill.

Stephen Timms: I hope that this clause will enjoy equal support in the Committee. I remind it that inheritance duties on large estates have existed in one form or another since 1694, when a tax of five shillings was introduced on all estates over £20. Inheritance inits current form is somewhat more recent, datingfrom 1986.
During the past financial year, inheritance tax yielded £3.6 billion, so it makes an important contribution to funding public services, and it is right and fair for such a contribution to come from the largest estates.
The fundamental structure of inheritance tax is straightforward. Each individual estate and the assets of the deceased, less any liabilities, are compared with the nil rate band in place at the time. If the estate exceeds the nil rate band, the excess, and only the excess, attracts inheritance tax at a rate of 40 per cent., which was set in March 1988.
The nil rate band is set at £300,000 for the current financial year and, in last year’s Budget, my right hon. Friend the Chancellor announced that the figure will rise faster than forecast inflation in the coming years to £312,000 in April 2008 and to £325,000 in April 2009. The clause provides for a further, above-inflation increase in the nil rate band to £350,000 for 2010-11.
The effect of the nil rate band allowance is twofold. First, it ensures that every individual can leave a substantial sum of money or assets to whomever they choose entirely free of inheritance tax. Secondly, it ensures that the tax is progressive. For estates above the nil rate band, the effective rate of tax increases according to the size of the estate, so in the current year a taxable estate worth £400,000 would pay £40,000 in inheritance tax, which is an effective tax rate of just10 per cent. In contrast, an estate worth £1 million would pay £280,000, which is an effective rate of 28 per cent. I hope the Committee accepts that it is right for those estates that are in a position to do so to make a greater proportionate contribution.
There has been widespread discussion about how many estates will be liable to pay inheritance tax, and I am afraid that some of that discussion has been misleading. In the past year, 35,000 of the 600,000 estates attracted an inheritance tax liability. The proportion of estates liable for inheritance tax is just6 per cent. The remaining 94 per cent. pay no inheritance tax whatever.

Adam Afriyie: The Chief Secretary says that just 35,000 estates or 6 per cent. will be caught by inheritance tax today, but has he rolled that figure forward? What proportion of estates and how many households and families does he predict will be caught in 2010-11?

Stephen Timms: The answer is 6 per cent. I expect the proportion in the year the hon. Gentleman refers to and that is covered by the clause to be precisely the same as now—6 per cent. That is very different from the impression that one might get from reading some newspapers.

Julia Goldsworthy: My question is along similar lines. What is the average size of an estate that ends up paying inheritance tax? The concern is that the largest estates find ways around paying inheritance tax and that smaller estates, which are just over the threshold, are caught because of poor tax planning.

Stephen Timms: I do not have the figure in front of me, but I hope I can give the hon. Lady some reassurance, particularly about the link between rising house prices and the payment of inheritance tax, which is where much of the discussion tends to focus. During the last quarter of 2006, the mean house price in the UK was £199,000. The median price, which I guess one might regard as the price of the typical property, was £175,000. In the south-east and London, the corresponding prices were £250,000 and £292,000 respectively. All those figures are within this year’s nil rate band.
One often reads comment in the press that misunderstands the position that we are in. When a home is owned with a mortgage, the mortgage debt will reduce the size of the estate as well. The truth is that the vast majority of property ownership falls well within the inheritance tax nil rate band. By fixing the band for 2010-11 at £350,000, we are continuing to provide certainty for families about the allowance in future years. I should like to underline my view that inheritance tax is fair, progressive and well targeted. I commend the clause to the Committee.

Theresa Villiers: This feels rather like “Groundhog Day”, because I am starting the Finance Bill 2007 as I ended the 2006 Bill—by talking about inheritance tax. However, everyone in the room will be delighted to hear that I am not going to speak for nearly as long this time round. [Hon. Members: “Shame.”] I think it was for a week last time.
The Opposition are obviously broadly supportive of the proposal to increase the threshold for inheritance tax. However, given the controversy surrounding inheritance tax, its rates and its thresholds, I should like to address the rates and bands in the clause. However, in case my remarks instantly prompt lots of interventions, I should make it clear before I start that I am not in a position today to put forward proposals to increase the threshold further or to amend the rate. I know that many would like me to, but I am unable to do so. That is partly because it would be foolish for my hon. Friend the Member for Tatton (Mr. Osborne) to write his 2009 Budget now, but it is also because the Opposition fear that when we win a general election in 2009 or 2010, the public finances will be in a pretty poor state. That means that we feel that the nation may well not be able to afford tax cuts in 2009. We believe that economic stability is more important tax cuts. Because we adopt that fiscally responsible approach, our priority on first being elected to Government is likely to be repairing the public finances. That is why we are not making up-front promises of tax cuts.

Wayne David: I will be generous. I can perhaps understand why the hon. Lady will not put forward specific amendments, but could she help us by at least giving some verbal indication of what she would liketo see?

Theresa Villiers: I have answered the question already. I have said that we are not making up-front promises of tax cuts.

Edward Balls: For the benefit of the Committee, will the hon. Lady clarify what proposal the tax commission set up by the Leader of the Opposition and led by Michael Forsyth made on inheritance tax?

Theresa Villiers: That commission put forward a range of interesting ideas on inheritance tax and other taxes. It proposed a significant reform of inheritance tax, which involved replacing it with a modified form of capital gains tax. That is one reform that I would hope hon. Members on both sides of the House would consider. That proposal is not the policy of the Conservative party; it is simply a proposal that we will consider, among the other ideas set forth in the Forsyth commission report.
We are always open to ideas to reform the tax system, whether they concern inheritance tax or any other sort of tax. Although we are not proposing tax cuts, it nevertheless remains important for both sides of the Committee, in assessing the merits of the rates and bands that the clause sets out, to reflect on the concerns that many of our constituents have about inheritance tax.
We should consider four points: first, the fact that, like previous clauses, clause 4 proposes to legislatefor the future; secondly, the controversy surrounding house prices and inheritance tax thresholds, to which the Chief Secretary has adverted; thirdly, concerns about the general operation of inheritance tax and how the thresholds can affect some vulnerable groups; and lastly, the interaction between IHT thresholds and the pre-owned assets tax regime.
I can deal briefly with the first point by asking the Chief Secretary a question. Why does the Chancellor wish to legislate for the future in this area? As we have heard, the clause focuses on the financial year 2010-11. I am struck that he is legislating that far ahead, and I should be interested if the Chief Secretary can provide precedents. It seems odd, as the Chancellor prepares to move from No.11 to No.10, that he should be so keen to tie the hands of his successor. I should be interested to hear the rationale and whether it makes sense to set thresholds this far in advance.
My second point is more substantial and concerns the impact of rising house prices on the thresholds that we are considering. Increasing concerns have been raised about the expanding impact and reach of inheritance tax. I have received many representations on the subject. Inheritance tax is no longer a taxonly on the rich. For example, in May 2002, the distinguished accountant John Whiting wrote in the Financial Times that inheritance tax is
“increasingly a tax that affects Middle Britain.”
IHT has expanded in recent years to cover people on modest incomes, which is due in no small part to the fact that the threshold has not kept pace with house price inflation. The value of many family homes is edging over the current £300,000 threshold.
In March, the Halifax published figures on the interaction between house prices and those thresholds. Since 1995-96, house prices throughout the UK have increased by 199 per cent., which is more than double the increase in the inheritance tax threshold. The Halifax estimates that the number of properties valued above the IHT thresholds has nearly doubled in five years; it believes that the number of owner-occupied properties in the UK that are valued at more than the 2007-08 threshold of £300,000 stands at 2.3 million, or 12 per cent. of all owner-occupied properties. In 2001, only 1.3 million properties, or 7 per cent. of owner-occupied properties, were valued at more than the then IHT threshold of £242,000. The Halifax went on to project that the number of properties valued at more than the IHT threshold throughout the UK could rise by a further 88 per cent., or 2 million, to 4.3 million properties by 2020.

Adam Afriyie: Does my hon. Friend share my concern that inheritance tax is a burden for middle England and the middle classes? Those who are very wealthy can always come up with schemes and ways to get around paying it.

Theresa Villiers: I certainly think that the impact on those with middle incomes can be tougher than it is on those with high incomes.
The Chief Secretary has given us the figures for estates that are currently caught by inheritance tax, but the real anxiety is over the projections of how many people will be drawn into the inheritance tax net in the future. On the basis of the Halifax figures, the number of postcode districts in England and Wales with an average house price above the IHT threshold would more than double from 236 in 2006 to 480 in 2020, which would account for 23 per cent. of all postcode districts. That would be mitigated by the changes, which the figures predate, but the problem will continue to occur. The Halifax figures for February 2007 show that the average house price in greater London had increased to £287,000 by the end of 2006, taking it above the £285,000 threshold then in operation. Although the national average house price is still below the threshold, average house prices in London and the south-east are edging above the rates that are in effect.

Ian Lucas: The Chief Secretary has already indicated that the proportion of estates on which the tax is paid will remain static at 6 per cent. Does the hon. Lady have any evidence to suggest that that proportion will increase?

Theresa Villiers: Grant Thornton produced a good report on the subject, which estimated that if asset prices continue to grow at their long-term average rate between now and 2009, the number of tax-paying estates could rise to 45,000 or 50,000. Again, that figure will be slightly mitigated by the increases that we might see in the future, but Grant Thornton is talking about 2009 figures. There is some evidence that the reach of inheritance tax will expand over the next few years.
Looking at the mitigating effect of the threshold that we are examining today—the £350,000 threshold—the delay in its implementation will mean, of course, that it will not necessarily address my concerns. That is because one can expect house prices to keep increasing; there is at least a significant chance that they will keep increasing and a significant chance of an increase in the number of estates that have to pay tax.
The expanding scope of inheritance tax is illustrated by the amount that it raises. The Halifax research examined cumulative inheritance tax revenue over the five years to 2007-08 and calculated it as £16.4 billion, up more than 50 per cent. from the £10.8 billion raised by the Government in the previous five years. As we have heard, revenue raised in 2006-07 was £3.6 billion and that was up 12 per cent. on 2005. The Government project a significant increase in annual IHT revenues, which are expected to top £4 billion in 2007-08. There are serious issues to be addressed regarding the interaction between house prices and the thresholds.
The third set of issues to which I would like todraw the Committee’s attention concern the general operation of inheritance tax and the threshold that the clause amends, and the impact on certain vulnerable groups. The impact of the current threshold would have been significantly more controversial were it not for the spouse exemption for inheritance tax. As we all know from last year, that exemption enables husbands and wives to pass property between one another free of inheritance tax. In assessing the appropriate thresholds and rates, the Committee should take into account the scope of that exemption, since it has a significant impact on how the overall tax operates and upon whom the burden falls.
Were it not for the spouse exemption, many more people would have had to sell the family home to pay their tax bill. That is why the Government’s proposals to limit the spouse exemption in the Finance Bill 2006 were so controversial and why their turnaround on that issue was so widely welcomed. Another significant change is the Civil Partnerships Act 2004, which expands spouse exemption to gay couples entering a civil partnership.
There is another matter that all parts of the House should consider, in a completely bipartisan way, in respect of inheritance tax and how it should be reformed: the question of long-term dependent cohabitees who do not have the option of using the spouse exemption via marriage or a civil partnership. They might be long-term carers of elderly parents, adult disabled children living with their parents or, as illustrated by a case in my constituency, sisters who have lived with one another for many years. My constituent, Ann James, wrote to me on several occasions to set out her grave concerns about the impact of inheritance tax on her and her sister. She expects to have to sell her home if her sister dies before she does, and vice versa.
Those who cannot use a spouse exemption can often be harshly treated by this legislation, particularly in a constituency such as mine, where house prices are high. As well as the position of dependent cohabitees, the Committee should also briefly consider—I promise that I will raise this matter briefly, Mr. Gale—the after-effects of last year’s changes to inheritance tax and trusts, and their impact on another vulnerable group: the disabled. We had a lengthy and controversial debate on that issue, and I will not repeat the arguments, but it is worth noting that those affectedby the changes that were introduced still have real difficulty working out how the system operates and affects the disabled.
It is an incredibly complex system and I turn to the effects of the thresholds that we are considering in the clause. As I am sure you are aware, Mr. Gale, trusts for disabled people often exceed the £300,000 threshold that is currently in place and the £350,000 threshold that we are considering putting in place for 2010. That is because sums of money devoted to caring for disabled people often have to cover a lifetime of care. Trusts are frequently used in such a situation, particularly where personal injury damages are received as a result of litigation. However, settlements resulting from damages or compensation payments could easily exceed £350,000. Under the current schedule 20 regime, such trusts are frequently affected by inheritance tax. Before last year, that was never a problem because people used life interest trusts, but that option has broadly been shut down by the Finance Act 2006. I have received representations about the framework that resulted from the 2006 Act as it is a complex system with considerable confusion about trusts for disabled people.

Rob Marris: I am listening carefully to what the hon. Lady says, but, as a former personal injury lawyer, I cannot quite understand her point about damages for those who have a major disability as a result of an accident. Those damages are sometimes transferred into trusts to provide compensation for an individual during the course of their life, not for their heirs and successors. Without going into too much depth, perhaps she could explain how that type of trust for someone with a disability comes into play?

Theresa Villiers: The problem occurs when the trustis set up because, as a result of schedule 20, an inheritance tax charge will automatically be incurred unless the person for whom it is set up is covered bythe limited disabled exemption. As we discussed, the exemption for disabled people is quite narrow and depends on someone’s entitlement to disability living allowance. Therefore, a significant range of people who have important disabilities do not fall within the definition. That is one of the key issues. The other issue relates to the complex interaction between income tax, capital gains tax and IHT rules. Essentially, the problem is that it is difficult for a disabled person to get the allowances to which they are entitled under all three taxes. There are occasions when the two taxes are doubling up and a CGT charge and an IHT liability is incurred in the same situation, which makes the system tougher than it was before the Finance Act 2006. That probably was not intended to be a result of the 2006 Act and, on the record, I ask the Chief Secretary to look at that issue. I believe that the 2006 Act was not meant to have such an effect and I am sure that the Government did not mean to penalise disabled people for using trusts. People are concerned about that problem and there is a strong case for reform and a simplification of the rules. I hope that the Chief Secretary can say today whether it is a matter of interest to him and whether the Government are prepared to consider the issue with a view to introducing reform of the legislation next year.
I have trespassed on the Committee’s patience for too long already, so I lastly mention that the Government’s ferociously complicated pre-owned assets tax regime interacts with inheritance tax. The regime was created to prevent people from avoiding inheritance tax and I will not anticipate the discussion that we will have about clause 25, but it is unfortunate that the Government have failed to resolve the problems with section 80 of the 2006 Act. They have also failed to deal with the problem of elections between inheritance tax and the harsh pre-owned assets tax regime.
In conclusion, as we have heard, inheritance tax continues to be a matter of deep controversy for a range of different political commentators and hon. Members. I hope that the Minister will consider some of the points that I have raised, particularly the expanding reach of inheritance tax on middle Britain and whether we need to reform the system to deal with the position of dependent cohabitees. In relation to schedule 20, we must ensure that the system doesnot operate to the disadvantage of disabled people, many of whom find trusts useful and, as a result of schedule 20, may have an increased inheritance tax bill.

Rob Marris: It is a pleasure to serve under you again, Mr. Gale.
I have to say to the hon. Member for Chipping Barnet that, if that was an abridged version of her speech, it was rather like reading a version of “War and Peace” in which the only abridgement has been to get rid of all the excess names and titles. On inheritance tax, I understand why the Conservatives will not put forward any figures at the moment. Their only slim chance of getting into office in 2009-10 will be if public finances are poor. In those circumstances, were the electorate misguidedly to put them into office, they would be able to do nothing about inheritance tax, so she is at least being honest.
It always interests and saddens me that the Conservative position on inheritance tax is basically a defence of the rich and scaremongering. For almost everybody who pays inheritance tax and who is not very rich, it is a tax based on a windfall gain due to the increase in the value of property. In most cases, that occurs not because of any action taken by the individual but because the market has risen. Secondly, it is paid only on death, so in almost every case except that of the super-rich, it is a tax on a windfall gain that is paid on death, which seems to me a reasonable tax.

Adam Afriyie: Does the hon. Gentleman really not recognise that many people work incredibly hard for their entire lives to support their families and secure them in a home? They are not deeply wealthy people but people such as the owners of owner-managed businesses all over the country, who keep those business going for their families. We are talking not about extremely wealthy people but about middle England, average income, average people.

Rob Marris: No, I do not accept that. I do not accept that they are middle income people. We are not talking about income. Inheritance tax is a capital tax. The idea of middle income is rubbish. People on an average income, unless they are incredibly hard savers, will never get to the threshold unless they buy a house and it goes up a lot in value. The hon. Gentleman, who is a very successful business person, may not realise it, but for those of us who have been on decent incomes for most of our working lives, the concept of being able to save anything like £350,000, apart from through a house, just out of a bit of income is completely alien. With “middle incomes”, to use the phrase used by the Opposition, in most cases, it comes about because people have a windfall gain in the increase in the value of their private home. That is why the Opposition keep banging on about house prices.

Brooks Newmark: I am curious. Does the hon. Gentleman want a more European society in which individuals do not save? Does he wish to have a society in which people are encouraged not to save but to spend all the money that they earn, and not invest at all in the future for the sake of their families? Is that the sort of society that he wants, or would he prefer a society in which people, having put money aside, see some benefit accruing to their families?

Rob Marris: First, I was born and raised in this country and have lived all but nine years of my life here. I have always been a European and I shall remain a European. Secondly, in terms of people’s savings, I do not accept the intellectual constraint of the hon. Gentleman’s argument. People work hard in this country, and people save money. People buy houses. For a lot of people, including me, the value of those houses—in my case over 23 years—has gone up about tenfold. That is not because of anything that they have done but because the market has gone up. I have no objection to people paying inheritance tax on that windfall gain. Most of the people whom we have discussed have benefited from the general rise in house prices, not from their thrift in building up a business. Those who have built up a business above the threshold or saved money have done very well. Good luck to them. I do not think that they should object to an inheritance tax that has to be paid on death.
The Grant Thornton figures that were cited by the hon. Member for Chipping Barnet—35,000 to 40,000 or even 50,000—represent, in round terms, an increase from 6 per cent. to 8 per cent. of estates. Given that fewer than 10 per cent. of people in the United Kingdom pay higher-rate income tax, we are talking about the well-to-do, including every hon. Member and right hon. Member here, because we quite properly pay higher rate taxes, even though by some standards we do not earn a fortune. I am very well paid for being a Member of Parliament, and I have no other source of income. I am happy to pay tax at the higher rate. I do not regard myself as wealthy, and I should be quite happy to pay the inheritance tax were my estate valued above that threshold. As far as I know, our estate—that of my wife and I—will not be valued above that threshold. We do not live in London. Some people in London who have very high house prices because of rising house prices will pay inheritance tax.
The hon. Member for Chipping Barnet has a point, however, about—in shorthand—the sister situation. The Government will have to consider that. In that situation, there should not be an exemption from inheritance tax in the same way that there is for transfers between spouses upon death, but the Government should consider a deferral of inheritance tax. I stand to be corrected, but when one sister dies, having lived with the other in the same house for 40 or 50 years because neither of them married or entered a civil partnership, the inheritance tax that is payable on their death should be deferred, so that the second sister can carry on living in what is essentially the family home.
Having said that, I have a couple of minor technical queries for the Chief Secretary. First, the wording of subsection (3) is, to say the least, opaque. For a lay person like me, it does not appear to bear much relation to explanatory note No. 4 on clause 4, so I urge the Chief Secretary to look at it again.
Secondly, it will not surprise Members to know that I strongly object to the wording of subsection (4), starting as it does with “But”. In that context, the word is completely redundant. However, the wording is also opaque to the lay person, and it does not appear to bear any relation whatever to explanatory note No. 5.
In addition, “that section” in subsection (4) may refer to
“section 8 of IHTA 1984”,
 which subsection (3) mentions. However, grammatically, the sudden appearance of “that section” means that it does not necessarily refer to any particular section. The parliamentary draftspeople need to have another look at it. There is opaque wording in subsections (3) and (4), there is the anathema of “But” at the beginning of subsection (4), and “that section” in subsection (4) does not appear to relate to any specified section therein.

Julia Goldsworthy: The clause sets out the rate of inheritance tax at £350,000 for 2010-11. The Chief Secretary echoed the words that were used when the provision was set out in the Budget, saying that the threshold change would be introduced to continue to provide a fair and targeted tax system. I do not think that anyone would go against that intent, and to give credit to the Government, the change raises the inheritance tax threshold in real terms for six successive years.
There is an issue about the fact that the Bill sets the rate for 2010-11. We have already had a debate about the corporation tax and income tax changes that will kick in next year. The provision under discussiongoes one step further, showing perhaps that the chancellorship will move to No. 10 along with the current Chancellor. Owing to the announcement of other significant tax changes and the headlines that they grabbed, the change before us perhaps slipped by the wayside.
 How will the real terms growth involved in lifting the threshold fit with the current and projected growth in house prices? I should also be interested to know the average size of the estates that pay inheritance tax. If we are serious about providing a fair and targeted tax system, our chief concern should be about what happens to very wealthy estates. We have been discussing people who largely fear inheritance tax. They live in their property, and it is more difficult for them to dispose of their asset than it is for people who are incredibly wealthy and have all kinds of assets that are easier to dispose of in the lifetime gift system. If the tax system is to be fair and targeted, we must recognise that there is an inconsistency between the treatment of lifetime gifts and the inheritance tax system. The concern is that it is easier for people with higher value assets to dispose of them in a way that avoids inheritance tax than others—I do not mean those on an average income. As we have heard, a significant number of people are involved, but when we talk about averages, a large number of people fall below the average. The concern is that the people at the level above the average will find it easy to dispose of their assets; they have seven years to do so and do not live in their assets in the way in which the people who are concerned about inheritance tax do. Not dealing with that inconsistency means that the system is not targeted or fair.
My constituents have brought the issue to my attention. I live in a part of the country where average incomes are probably 20 per cent. below the national average, but some houses have seen price rises among the highest in the country. Fishermen, who live in family cottages and have a family business have children who will not be able to stay in their property. Fishermen live in the area to do their job, but because properties are bought as second homes and house prices are going through the roof, there is no way that someone doing that job can continue to live in that property.
Another issue that is regularly brought up in my surgery concerns people who fall into the inheritance tax boundaries because they have not had proper advice. The wealthier someone is, the easier it is for them to employ an accountant or lawyer for advice on how best to make use of the allowances and the spouse exemption and on how to maximise the use of the thresholds. People come to me who failed to do that through their own error, but then saw themselves and their families caught by inheritance tax. What can the Treasury do to ensure that such people understand and can make the best use of the system?
What comparisons has the Treasury made between the projected rises and the increase in house prices? For many people, inheritance tax is a stealth tax. As the hon. Member for Wolverhampton, South-West said, people live in their asset, and so they might not know the value of the property until they have to realise the estate. There is a lack of understanding and a fear that thresholds will not keep pace with house price inflation, which will mean that people will unwittingly be caught by the system. People do not understand what they need to do to make the most of their allowances, as they are entitled to do.
My key concerns are about the lack of understanding and about whether the tax is consistent with the Government’s taxation of wealth. The poorest 20 per cent. pay a higher proportion of their income in tax than the richest 20 per cent. What can the Government do to inheritance tax to ensure that they capture the growing wealth, especially among the richest 1 per cent.? If the idea is to make the system fairer and more targeted, the Government need to go far beyond the clause. Fundamentally, the treatment needs to be consistent not only for properties but for other assets. The Government must also be consistent in how they deal with lifetime gifts, which are the easiest way for people who can easily dispose of their assets to get out of paying inheritance tax. The situation is difficult for those with a property, and people are getting confused. They are unwittingly getting caught, and that is where the chief concerns lie.

Adam Afriyie: They say that there are two certainties in life: death and taxes. The Government—I am not sure that they should be commended, because it is rather alarming—have managed to combine the two for about 50,000 people. In 1987, about 18,000 were caught by the inheritance tax threshold, and by 2009-10 up to 50,000 people could well be caught.We were having a little debate earlier with thehon. Member for Wolverhampton, South-West, who observed that the people caught in the inheritance tax trap are relatively wealthy. I argued that they are not necessarily wealthy but can easily be people with a middle income who have been doing the right thing for most of their lives.
The reports that we have been talking about and the projections for estates caught in the inheritance tax trap extend only to about 2010 or perhaps 2011. If those forecasts are rolled forward 20 or 30 years, far more people will be caught in the trap. It is self-evident that most people with mortgages in this country have repayment mortgages, or the value of the mortgage compared with the property falls gradually over a long period. That will of course have an impact on their estates at the unexpected time when they pass away.
The other thing to remember is that inheritance tax is not just about house prices. Many people on average salaries amass enough during their lifetime to cross the current threshold, perhaps not by 2010, but certainly by 2015 or 2020 as they gradually pick away at their mortgages and, hopefully, save for their pensions funds. All sorts of assets are built up over a longer period. I have concerns about the very long term and the number of people who will be caught.
I am also concerned about people who are self-employed and owner-managers of small family businesses. They may make a small profit each year—perhaps £50,000 or £100,000—and when those businesses are sold on death, their value may be in the region of between five and 15 times net annual income. People who have worked hard all their lives, perhaps with family members, and built up an asset in a business are caught within the inheritance tax threshold. It is not just house prices that affect the number of people caught in the trap.
A wider debate that is of interest concerns what sort of tax we want to raise in the United Kingdom. There is a strong argument for income tax to be lower during our lifetime while we are working hard and generating  prosperity for the nation. There is also an argument that inheritance tax should be higher. We should not dismiss immediately any concept that what we have today should be fixed in stone. The matter needs consideration, so I am not blinkered about inheritance tax and am not saying that it is inherently a dreadful and bad tax, but it is certainly double taxation. In 1997, we did not expect to see what has happened by 2007, but we should not be too rigid in our view of exactly what sort of taxation is right or wrong in the economy.
It seems odd and bizarre that we talk about corporation tax on small businesses only one year ahead—although we have been talking about two or three years ahead—and all of a sudden we are told out that in 2010 the inheritance tax threshold will be £350,000, marginally above the rate of indexation if it were indexed. Why have the Chancellor and the Treasury chosen to do that now when in so many other areas they have covered their hand to hide or obscure what the tax regime may be in a few years’ time?
We are talking about inheritance tax rates in 2010. What sort of behaviour is that supposed to encourage? Is it to encourage us all to live longer than 2010, or to die sooner than 2010? What is the objective of making the announcement today rather than indexing the allowances? Why choose to announce today what will happen in 2010? What is the rationale behind that?
Finally, I have a general question for the Chief Secretary. What is the announcement’s objective? Is it to stop people growing the value of their estate by spending money during their lifetime? Is it to stop hard-working families with owner-managed businesses passing them on, or selling the business early and spending the money? Or is it a straightforward tax-raising mechanism, albeit indexed marginally higher than the rate of inflation today? I should appreciate clear answers to my questions.

Brooks Newmark: There is a perception that inheritance tax is an archaic, deeply regressive, immoral tax, not least because it amounts to a double taxation. I am not here to incur the wrath of my Front-Bench team, and it is beyond my remit as a mere Back Bencher to suggest tax changes, but it is my role as a member of the Opposition to probe and to question.
I did not need to read the explanatory notes because the clause heading states, in bold print, “Rates and rate bands”. I expected them to be for 2007-08, but, blow me, the heading continues, “for 2010-11”. Why do the general public, who have concerns about the motives behind inheritance tax, have to wait for 2010-11 for the band to be raised to £350,000?
The Chief Secretary did a good job of answering the question on corporation tax, which I appreciated. The hon. Member for Falmouth and Camborne and my hon. Friend the Member for Windsor asked why we had to wait for 2010-11, and I may have an explanation for them: inheritance tax is another example of the Government’s commitment to taxation promoting behaviour change by encouraging people to live long enough for them to leave office. But who knows? The year 2010 is a long way off and there is much damage that the Government can continue to do with the tax system.
The Chief Secretary said that roughly 6 per cent. would pay inheritance tax, yet my hon. Friend made the point that in 1997, roughly 18,000 people paid inheritance tax. I do not have the projected figures, but in 2005, 37,000 paid inheritance tax, more than double the 18,000 figure.
I also have figures from research carried out by the analysts Lombard Street Associates, who indicated that the number of people whose wealth stands above the inheritance tax threshold is set to rise from 2.1 million in 2002 to approximately 4.5 million in 2009. How does that square with the 6 per cent. figure?
It is not for me to make suggestions on tax cuts, or on where savings can be made, but I shall slightly provoke my hon. Friend the shadow Chief Secretary and make the minor suggestion that money wastedon the tax credit overpayments alone amount to£1.8 billion, which is only 50 per cent. of the£3.6 billion estimated to be collected in inheritance tax receipts. Perhaps the Government could consider some flexibility in that small area.

Julia Goldsworthy: I wonder whether the hon. Gentleman’s earlier comments on the Laffer curve would apply in this case. If inheritance tax rates were reduced, would fewer people choose to die?

Brooks Newmark: They may have no choice over whether or not to die, but they do have a choice over whether to make their tax affairs more efficient. A lot of people who very much believe in the spirit of what the hon. Member for Wolverhampton, South-West said about our having a due to society and our obligation to leave something behind. I would therefore encourage the Government to think again about where savings could be made, so that they could perhaps raise the threshold a little more, so as to encourage people to save for the future and give to their children.

Stephen Timms: The hon. Member for Chipping Barnet gave us a very different perspective on the Forsyth report from the shadow Chancellor when it was published. If I recall, he warmly welcomed it. She described it simply as a set of potentially interesting ideas that the Opposition will consider, along with all the others proposed to them. That was a striking and noteworthy contrast.
The hon. Lady asked me, as did other Opposition Members, why we were announcing the nil rate threshold for 2010-11 so early. She then talked about what house prices would be like in 2020, and I thought that she was going to ask me to announce the threshold for then, too. In fact, setting out the threshold a few years ahead, as we have done consistently over the past few years, is helpful in giving families confidenceabout how things will be over the period ahead. The threshold for the current rate was announced in the 2005 Budget, while the threshold for the following two years was announced in last year’s Budget. We are simply maintaining that practice.
There has been some discussion about the incidence of estates paying inheritance tax. In 1986-87, the proportion of those paying inheritance tax was not what Opposition Members said it was—it was 5 per cent., or 30,000 estates, so only fractionally below what it is now. The rate was 6 per cent. in 2004-05, 6 per cent. in 2005-06 and 6 per cent. last year, and I expect it to be 6 per cent. consistently over the next few years.

Theresa Villiers: On that point, I have a Library note that indicates that the figures for 1997-98 were 3 per cent. and 18,000 estates, which is consistent with what my hon. Friends stated, rather than with the figures that the Chief Secretary has just quoted.

Stephen Timms: No, the hon. Member for Windsor was referring to 1987. In 1986-87, the figure was 30,000, or 5 per cent. of estates.

Adam Afriyie: My apologies, but just to clarify, I did mean to say 1997.

Stephen Timms: It may nevertheless be of interest to the Committee that the figure in 1987 was 30,000, or 5 per cent. of estates.
The hon. Member for Chipping Barnet said that there were some outstanding difficulties with the way in which the trust provisions from last year were operating. I have seen little evidence of that, but if she wants to drop me a line or draw my attention to any particular difficulties, I should be glad to look at those. Neither she nor any other Opposition Member has tabled an amendment to the clause, so I presume that they are broadly happy with how the arrangements are working. However, if there are particular difficulties, I should be happy to consider those.
The hon. Lady made the point—my hon. Friend the Member for Wolverhampton, South-West picked this up, too—about the position, which one could well imagine occurring, of two sisters living together in a house that had grown to be worth quite a large amount. The approach that we prefer—I think it is the right approach—is to uprate the basic nil rate band for all taxpayers, rather than to introduce a special relief for a specific group. One could imagine how such a relief might work, but, again, nobody has proposed such a relief in an amendment and it would be quite complicated to introduce one.
We all support simplicity, and inheritance tax is straightforward in how it works. There is a good deal to be said for our approach, which is to uprate the basic nil rate band beyond inflation, so reducing the bill for all taxpayers and taking some estates out of the tax altogether. It may be helpful to make the point that where inheritors do not wish to sell a house, inheritance tax that is due on that house can be paid in instalments over 10 years, provided that the house is not sold. In some instances, that might be helpful.

Adam Afriyie: The Chief Secretary drew party political pleasure by pointing out that in 1987, 30,000 people were paying inheritance tax. Does he seek to equal our record of reducing the number of people who pay inheritance tax in the next 10 years?

Stephen Timms: No. As I have made clear, I expect a pretty steady proportion of estates to pay inheritance tax in the next few years. I expect it to remain steady at around 6 per cent., so 94 per cent. will therefore pay no inheritance tax.
The hon. Member for Chipping Barnet asked about trusts for disabled people. As she knows, they were taken out of inheritance tax in specific circumstances. Although I was not here, I know that the rules and the  qualifying criteria were debated at some length last year. If there are particular issues that she would like us or Her Majesty’s Revenue and Customs to consider, she should draw them to my attention in a letter and I will be happy to ensure that that happens.
My hon. Friend the Member for Wolverhampton, South-West was uncertain about the wording of the clause. I hope that I can help him. Subsection (3) is used to set the nil rate band for 2011-12—that is to say the year after the value of £350,000 set by the provision earlier in the clause. Subsection (4) will stop the retail prices index increase for 2010-11. I think that that works correctly. If he thinks otherwise, I am sure that he will draw my attention to that fact.
The hon. Member for Falmouth and Camborne asked about the average value of an estate paying inheritance tax. I do not have that figure to hand. However, I do not accept that inheritance tax is optional for wealthy people. We have taken determined steps to close loopholes in inheritance tax to ensure that people pay their fair share. In addition, we keep inheritance tax under close review, and people looking at our record will be in no doubt that we will act against unfair tax avoidance in this or any other area.
The hon. Lady asked what will happen given future house price increases. As I said, we believe that the threshold that we have set will keep consistent the proportion of estates paying inheritance in the next few years. The thresholds take account of expected increases in house prices over that time.
The hon. Member for Windsor suggested that inheritance tax might be set at a higher rate. That is an interesting suggestion, and one which may commend itself to his hon. Friends. To respond to his point on owner-managers, £350,000 is a substantial sum in that instance. There is specific relief, however, for qualifying privately owned businesses, which can reduce, or in some cases eliminate, inheritance tax, which may be helpful in the circumstances that concern him.
To describe inheritance tax as double taxation,as the hon. Member for Braintree did, is to make a completely specious argument. It is rather like saying that VAT is double taxation because people have already paid income tax on their income. As he knows, double taxation is a pretty well-defined concept and I certainly do not think that it applies in this instance.
On the whole, the Committee has welcomed the fact that there will be above inflation indexation.

Brooks Newmark: Perhaps the right hon. Gentleman buys houses differently from the rest of us. Those of us that buy our houses buy them with income and we have paid our tax on income. Having paid our tax on income, if we are then hit with inheritance tax at the end of the day, that is indeed a double taxation.

Stephen Timms: Presumably the hon. Gentleman takes the view that VAT is also double taxation.

Brooks Newmark: It is.

Stephen Timms: The hon. Gentleman confirms that that is his view, in which case I would be very interested to know what implications he draws from that. However, I do not think that he is on to anything fruitful with that line of argument.
I am grateful that the Committee has welcomedthe fact that the nil rate threshold will be increased ata rate above inflation. I commend the clause to the Committee.

Question put and agreed to.

Clause 4 ordered to stand part of the Bill.

Roger Gale: Before we proceed, and in case an adjournment conflicts with a Division on the Floor of the House, I would like to indicate to Members now that there are red boxes behind me for the storage of Members’ papers for the duration of the sittings of the Committee.

Clause 5

Rates of duty on alcoholic liquor

Question proposed, That the clause stand part of the Bill.

John Healey: May I welcome you, Mr. Gale, to the Chair, or more strictly welcome you back as the Chair of the Finance Bill after an absence of some four years? I look forward, as my colleagues do, to serving under your chairmanship during our proceedings.
Clause 5 increases the rates of excise duty charged on beer, wine, made-wine and cider in line with inflation. Excise duties on alcohol provide an important£8 billion annually to invest in essential public services. This inflation-only increase in duty, which, together with VAT, is equivalent to around 1p on a pint of beer and on a litre of cider, 5p on a bottle of wine and sparkling cider, and 7p on a bottle of sparkling wine, is necessary to maintain this important source of revenue to the public purse.

Adam Afriyie: Will the hon. Gentleman make it clear whether this measure is an economic measure, to raise taxation on alcohol, or a social measure, to try to limit the harm that these products might cause?

John Healey: It is a revenue measure, and one that is entirely consistent with the convention and the usual approach to excise duties, which is that, generally, this Government and previous Governments would, at first blush, look to increase duties in line with inflation, at least to maintain their real value.
This is a modest increase—a freeze in real terms—which comes after actual freezes in beer and still-wine duty in three of the previous 10 Budgets. In addition, cider duty was frozen in the previous four Budgets and sparkling wine duty was frozen in each of the previous six Budgets.
There have been concerns about alcohol-related harm, its social impact and the quite serious problems that it causes in some areas; that may have been what the hon. Member for Windsor was driving at, and I look forward to hearing any contribution that he would like to make to the discussion. As a result of those concerns, and as a proposed response to those problems, there have been calls for significant increases in duty. However, the view that the Government take—it is the view that we have consistently taken in the Treasury—is that that sort of social harm and social concern is best tackled by social legislation and by working with the trade in self-regulation, rather than by taxation, which, in this circumstance, is an instrument that is not best suited to deal with the social problems that we are discussing. In fact, it wouldbe likely to penalise the vast majority of responsible drinkers rather than affecting the minority who cause us concern.

Julia Goldsworthy: Will the Financial Secretary concede that there might be one exception—super-strength lagers? People with significant addiction problems buy such lagers because they are the strongest and cheapest drink, so the price contributes to their decision. Generally, they are drunk by people with problems. Does he not think that changing the price might go a significant way towards tackling that specific problem?

John Healey: Not entirely, because the generalcase for using taxation as a means of regulating consumption has not been made. It is not best suited to this area of policy. In addition, concerns have been expressed by some in the alcohol industry who argue that higher energy and raw materials prices, and their impact on consumer demand, have created a difficult trading environment for them over the past year. We recognise that the industry makes an important social and economic contribution to the life of this country. I would argue that the modest inflation-only increase in the duty on beer, wine and cider recognises those concerns, while providing the important stream of revenue that is necessary to maintain our commitment to public services.

Paul Goodman: May I make it clear at the start of my contribution that I have not changed gender today? I was about to add that I am not aware of having done so at any other time, but members of the Committee, being as sharp as ever, beat me to it. I have not crossed the Floor to join the Labour party today, or at any other time. Nor have I improved my looks and intelligence by a factor of at least 100. That was all by way of saying that I amnot the hon. Member for Bishop Auckland (Helen Goodman), in case any member of the Committee is in any doubt. She would doubtless have made a significant contribution to the Bill had she been a member of the Committee, because she makes very good contributions to debates.
I do not think that I have served under you before, Mr. Gale. In welcoming you to the Chair, may I say that I am sure that if you are ever told that you have joined the Labour party, changed your gender or improved your intelligence—not that I am willing to admit that that is possible—you will bear all those complimentary remarks with the fortitude that I associate with you?
Having welcomed you in that way, Mr. Gale, I turn naturally to the clause and to alcohol duty. As I do so, I think of last year’s debate, at which you were notable to be present, although other members of the Committee will remember it—the hon. Member for Wolverhampton, South-West certainly will. Last year’s decisions were spread across two main clauses, one about beer and a separate one about wine. This year, the two of them are packed into one clause. I do not want to start the more serious element of my remarks on a pedantic note, but I am curious to know why they have been rolled together. Is there a significant reason for that? Although I suspect that there is not, perhaps the Financial Secretary will wish to clear that up later. [Interruption.]
I hear a remark from a sedentary position about the length of the tax code. I do not think that I should like to comment on that. I would, however, like to comment on the issues that face Ministers in deciding the balance of duties. They have to take into account a number of considerations. The duties have to be high enough to raise the revenue necessary to fund public services and all the causes that Ministers traditionally commend to us, but low enough to ensure—as with tobacco, about which we heard so much last year and I am sure we will hear more as the Committee goes on—that the law of unintended consequences does not apply. In other words, they must ensure that smuggling is not encouraged and revenue subsequently threatened. They also have to take into account the needs of domestic producers and have to be as fair as possible across the different drinks. It can also be argued—a case made by my hon. Friend the Member for Windsor—that duties on alcohol should play a part in improving public health.
The Financial Secretary said that such mattershad been treated in the same way by the previous Conservative Government as by the present Government and that taxation may not be best suited to bringing about the health results to which my hon. Friend referred, and that the case had not been made. It would be fair for him to be a little puzzled by that in principle because, after all, taxation is used in several other circumstances to encourage or discourage behaviour. Perhaps he may wish to contribute to the debate later on that point when we shall listen carefully to what he has to say.
I am not saying that the objectives are easy to reconcile. Having made it clear that we are not inclined to oppose the increases on the basis of what we know, I wish to ask the Financial Secretary specific questions about beer and some general questions about the Government’s strategy as a whole. Casting my mind back to last year’s debate, I recall that he referred to concerns in the wine trade, which was arguing at the time that demand for wine was beginning to weaken. He referred specifically to that point.
Noting that duty on beer had fallen by 6 per cent. in real terms since 1997, the hon. Member for South-East Cornwall said that there was
“clear evidence that alcohol, particularly beer, plays a large part in some of the antisocial behaviour, not least binge drinking, that we experience from time to time.”
I raised that issue not to disagree with or criticise what the hon. Gentleman said, but to give the Committee the flavour of last year’s debate. Although that debate was brief, it is fair to say that it was rather more sympathetic to the cause of wine than to the causeof beer.
The context this year is a bit different. The smoking ban in pubs and clubs is due to come into effect in July. The British Beer and Pub Association argues that the ban will have a disproportionate effect on beer sales and, in particular, on smaller, more traditional and out-of-town and city centre pubs for which beer represents a larger percentage of sales. Members of the Committee will have received representations from the association and their local brewers in the same vein.
The argument put forward by the association is worth considering in some detail. Beer is mainly a home-grown product; 90 per cent. of the beer drunk in the United Kingdom is made in the UK. The brewing and pub industry contributes more than £28 billion to the UK economy—some 2 per cent. of GDP—and exports more than 1.5 million pints of beer a day to more than 120 countries, generating nearly £300 million in export revenues. It employs roughly 20,000 people directly and creates more than 600,000 jobs indistribution, pubs and bars; 45,000 landlords run their own businesses and brewers buy more than 40 per cent. of the malting barley crop, thus helping to sustain the rural economy and rural communities.
None the less, the case that the industry has made this year—rather more vociferously and with more force than it made last year when the clause on beer went through pretty quickly—is that beer is under some pressure from rising energy costs that drive up the direct costs of beer production and distribution, and from changing consumer preferences, including some for products that are mainly imported. The example of wine is almost too obvious to state, but I shall do so none the less. The industry is also under pressure from changing patterns of consumption, such as the trend towards drinking cut-price beer that is available from supermarkets at home. Since 1997, beer consumption is down by 11 per cent. and continues to fall; 35 British breweries have closed in recent years with the loss of about 5,000 jobs. The association says that the total profits of Britain’s four biggest brewers fell by 50 per cent. last year, which is a considerable fall.
The question therefore is whether, as the association claims, the industry will soon be hit by a double whammy of the effects of those pressures plus the effects of the smoking ban. In Ireland, sales fell by7 per cent. in the aftermath of the ban, and I should be interested to know whether the Financial Secretary has a more up-to-date figure. Does he know whether the Treasury has made any calculations as to the combined effect on beer sales of the forthcoming ban together with the rise prescribed by the clause? Has it made specific studies of the experience in Ireland or elsewhere, and what is the combined effect on pub closures of the ban and the rise set forth in the clause—particularly in relation to the smaller, out-of-town or out-of-centre, traditional pubs to which I referred earlier? Furthermore, what assessment has the Treasury made of the effect on pubs of the availability of cut-price beer from supermarkets?
The association has got into the business of trying to calculate what happens to revenue, and claims that further tax rises will raise little extra money but willhit the industry hard. It says specifically that price elasticity of demand, a key measure of how price affects sales, is minus 1.5 per cent., and that that is three times higher than the Treasury estimates. In summary, it says that duty rises produce falling consumption and less revenue. It cites an alleged so-called “black hole” of £70 million to £100 million in Treasury finances. The Financial Secretary furrows his brow, but the figure is on the association’s website and I should be grateful if he would clear the matter up in due course.
When the Financial Secretary spoke last year about the long-running freeze on spirits, he said:
“The reason for the decision on beer duty compared with that on spirits”—
in other words, the freeze—
“is that spirits are significantly more heavily taxed than beer and we have in place a long-term policy of a fairer balance of taxation across all alcohol products.”——[Official Report, Standing Committee A,9 May 2006; c. 56.]
The reference to a fairer balance of taxation over a period of time suggests equivalence: taxing drinks solely on alcohol content. That would imply a continuing increase in duty on spirits, and an increase in wine duties. New world wines are stronger than old world wines, because the alcohol content is higher,so arguably a revision of wine duties would be necessitated. Is that what the Financial Secretary meant by a fairer balance? If so, has the Treasury calculated the effects of such a rebalancing on public health?
To return to this year’s changes, duties on sparkling wine were, as the Financial Secretary said, raised by3.4 per cent., having been frozen since 2000-01. Duties on cider and perry have been raised by 3.4 per cent, having been cut by 2 per cent. in 2003. Those are quite significant changes. After what was effectively quite a long period without any change in duties on sparkling wine, there has been an increase and, after a cut in the duty on cider and perry in 2003, there has now beenan increase on them too. That seems to be quite a considerable change of approach.
The Financial Secretary said last year that
“sparkling wine is the most heavily taxed of all alcoholic drinks. That is part of the reason why the decision that we took in previous years to freeze the duty on sparkling wine was taken again this year.”
One is inclined to ask: what has changed in the year since those comments? He went on to say, in a moment of levity that he might—who knows?—regret:
“There may be some champagne drinkers among the officials who support me on the Bill because I have a note that says the freeze on the duty on sparkling wine will affect not only the traditional champagne products to which the hon. Lady”—
the hon. Member for Falmouth and Camborne—
“referred, but the excellent sparkling wines from Britain.”——[Official Report, Standing Committee A, 9 May 2006; c. 56.]
He went on to list two.
I do not know whether his team of officials has changed—they look much the same to me—or whether they have simply given up champagne as a result of the current atmosphere in the Treasury. However, I would be grateful for the Financial Secretary’s comments on what changed his officials’ drinking behaviour in a year.
Finally, on smuggling, the Government published their UK alcohol strategy on spirits in 2005. It aimed to reduce the illicit spirits market to 3 per cent. by this financial year compared with a range of 0.8 per cent. in 2004-05 and 9 per cent. in 2001-02. HMRC figures duly showed the illicit spirits share smoothly declining in each year since 2001-02 and the estimated tax loss falling from £1.1 billion to £300 million. There has been a steady decrease, but the figures are not easyto reconcile with the fall in the amount of spirits seized. We learned from a parliamentary answer that the amount fell from 2.1 million litres in 2000-01 to 0.24 million litres in 2004-05. For wine, the amount fell from 0.61 million litres in 2000-01 to 0.29 million litres in 2004-05. Again, I would be grateful for the Financial Secretary’s comments.

Rob Marris: I have some brief remarks. I commend the hon. Member for Wycombe on his thoughtful comments. I was not contacted by the brewers, although one of the country’s largest brewers is headquartered in my constituency. It used to be called Banks’s, then Wolverhampton and Dudley Brewery and is now Marston’s. It is known to many hon. Members, and is led by its excellent chief executive, Ralph Findlay. It has been very successful and its profits have gone up markedly in recent years. However, I note from the explanatory notes that the duty on beer, wine and cider has been raised this year in line with inflation, but the duty on spirits is frozen and, in fact, is 27 per cent. lower than it would have been if it had been increased in line with inflation since 1997. The corresponding fall for beer is 3 per cent. in real terms; for cider it is 19 per cent.; for still wine it is 3 per cent.; and for sparkling wine it is 16 per cent. Can I tempt the Financial Secretary to say a little more about the fair balance, as he did last year?
I am faced with having a major brewer in my constituency who brews excellent beer, as many hon. Members know, yet the rate in the past 10 years has risen relatively a lot more compared with the rate for spirits.
Debate adjourned.—[Kevin Brennan]

Adjourned accordingly at two minutes to Seven o’clock till Thursday 10 May at Nine o’clock.